Pledgee benefits from security rights in connection with receivables pledged to him

In its 18 December 2015 ABN/Marell judgement, the Dutch Supreme Court held that if secured debt is pledged, the holder of that right of pledge has the authority to enforce not only its own pledge but also the security connected with that pledged secured debt. Such chains of secured debt are not uncommon, but often parties are not aware that they exist. According to this new case law, security down the chain can be used in the enforcement of the primary security.

Earlier case law suggested that this might be the case, but it was not conclusive. In the December 2015 judgement, the Supreme Court refers to its 2005 Rabo/Stormpolder decision, where the facts were as described below:

MHL took out a Bank Loan and failed to repay it. The Bank made an attachment in execution (in Dutch: beslag onder een derde) on assets of H, who had borrowed substantially from MHL and had put up his house as collateral for that Loan. The Bank then tried to enforce that mortgage to collect on its Bank Loan, although the Bank was not the actual mortgagee. The Supreme Court decided, nonetheless, that the Bank could make use of the right of mortgage and the priority that went with it.

In the December 2015 case it was decided that this Rabo/Stormpolder rule (if one has the authority to levy execution on debt that a third party has to the debtor, one can make use of security connected with that debt) also applies to a chain of pledged loans. In the December 2015 case, the facts were more straightforward:

After the Customer and Company A defaulted on their obligations, both pledges were disclosed to them as respective debtors. Subsequently, Company B went bankrupt. The Bank demanded payment directly from the Customer, as did the trustee in the bankruptcy of Company B. The Customer then refused to pay until it was clear who was entitled to the Purchase Price.

The Supreme Court ruled in favour of the Bank, and held that the right of the Bank as pledgee to claim payment of the Loan implied that it could make use of the security in connection with that Loan. The Bank could therefore claim payment of the Purchase Price directly from the Customer.

We advise lenders and borrowers to take note of this new case law and to make full use of these hidden security rights when giving, taking and enforcing security. As these rights are often not in plain sight, this requires a closer look at the receivables to be pledged.